1. If the term structure is upward sloping and the risk premium is negative, we know with certainty which of the following? i) Investors expect interest rates to rise ii) The two year rate is above the one year rate iii) The forward rate will be above the spot or current rate iv) The expected return from a two year bond is above the expected return from rolling over in two one-year bonds a) I and II only b) I, II, and III only c) II and III only d) I, III, and IV only

1. If the term structure is upward sloping and the risk premium is negative, we know with certainty which of the following? i) Investors expect interest rates to rise ii) The two year rate is above the one year rate iii) The forward rate will be above the spot or current rate iv) The expected return from a two year bond is above the expected return from rolling over in two one-year bonds a) I and II only b) I, II, and III only c) II and III only d) I, III, and IV only

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 3Q: The rate of return on a bond held to its maturity date is called the bonds yield to maturity. If...

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(Using algabreic formula to answer) (a) You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today?(b) In the next period however, the interest rate changes unexpectedly to i'. What is the new price of the bond? If the bond is sold at the beginning of that next period, what is the yield from the consol? Does the yield increase or decrease if i' > i? (c) Suppose alternatively that the market expects that the interest rate will changeto i' after the initial period. What is the initial value of the consol, and what is the yield from selling it after one period?
Assuming that the market and coupon rates remain constant till maturity; a.the bond's price will remain constant over time b.No option is correct c.the bond price will approach its market value over time d.the bond's price will approach its face value over time
Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 2.20 percent, and the 1-year interest rate is 2 percent. What is the forward rate according to the pure expectations theory? Group of answer choices 2.25% 2.20% 2.00% 2.40%
(a) You hold a two period bond that pays a coupon C at the end of each period. The interest rate is expected to be i for each of these periods. What is the price of the bond today? || (b) The interest rate changes to i' in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being (i) anticipated (ii) unanticipated.
5 Which of the following describes yield to maturity? Select one alternative O A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows. O The coupon rate that causes a bond price to equal its par (or principal) value. O Interest rate earned on an investment that starts today and last for n-years in the future without coupons. O Interest rates implied by current zero rates for future periods of time.
(a) You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? (b) In the next period however, the interest rate changes unexpectedly to i 0 . What is the new price of the bond? If the bond is sold at the beginning of that next period, what is the yield from the consol? Does the yield increase or decrease if i 0 > i? (c) Suppose alternatively that the market expects that the interest rate will change to i 0 after the initial period. What is the initial value of the consol, and what is the yield from selling it after one period?
One of the above is the most accurate statement?a. A bond is trading at a premium if its yield to maturity approaches its annual coupon.b. As interest rates rise, a 10-year coupon bond's relative price adjustment would be higher than that of a 10-year nil coupon bond.c. A coupon bond's present yield matches the yield to maturity whether it sells at par.d. Both a and c are true.e. None of the above claims are true.
Required: a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. Complete this question by entering your answers in the tabs below. Required A Required B Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Beginning Price of Bond of Year Expected Price 1 $ 935.90 2 $ 906.47 3 $ 837.12 4 $ 775.39 Required A Required B > B
The interest rate changes to i' in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being (i) anticipated (ii) unanticipated. ? [P'
The forward rate f(t1,12) of a bond, is the implicit interest rate in a future period between time t1 and t2. For example, assuming continuous time returns, if the discount rate from period 0 to t1 is: exp(-r t1), and from period 0 to 12 (greater than t1) is: exp(-r t2), then the forward rate f from t1 to t2 maintains the following no arbitrage relationship: exp(-r t1) exp(-f (t2-t1) exp(-r t2)). Suppose we observe the prices of a 14-year zero-coupon bond (with a face value of $93.31), where P(t1,t2) regans the price of the bond between t1 and 12, and a year 7-to-14 forward rate as follows:P(0.14) - $86.5496905000 and f(7,14) - 0.6074704253 %. Calculate the price of a 7-year zero-coupon, with face value $99.27: $82.9604 $96.0778 ✓(25 %) $96.2349 $82.1804
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
(a) You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remainunchanged. What will be the price of the consol today? (b) In the next period however, the interest rate changes unexpectedly to i'. What is the new price of the bond? If the bond is sold at the beginning of that next period, what is the yield from the consol? Does the yield increase or decrease if i'> i? (c) Suppose alternatively that the market expects that the interest rate will change to i' after the initial period. What is the initial value of the consol, and whatis the yield from selling it after one period?